Standard of ‘likeness’ in Art III:2, second sentence

Article III:2, second sentence provides: ‘no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.’

As mentioned above, the reference to Article III:1 establishes the general principle which assumes that internal taxes and other internal charges should not be applied to imported or domestic products so as to afford protection to domestic production.

The scope of this provision is limited by accompanying Interpretative Note Ad Article III: 2 of the GATT[1], according to which: ‘a tax conforming to the requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the provisions of the second sentence only in cases where competition was involved between, on the one hand, the taxed product and, on the other hand, a directly competitive or substitutable product which was not similarly taxed’.

The Interpretative Note does not only constitute an interpretation suggestion or indication. In the Japan – Alcoholic Beverages II case, the Appellate Body defined its legal status as follows:

‘Article III:2, second sentence, and the accompanying Ad Article have equivalent legal status in that both are treaty language which was negotiated and agreed at the same time. The Ad Article does not replace or modify the language contained in Article III:2, second sentence, but, in fact, clarifies its meaning. Accordingly, the language of the second sentence and the Ad Article must be read together in order to give them their proper meaning.’

The extent of the second sentence was a subject of several WTO decisions. In the case of Canada – Periodicals, the Appellate Body set out the order of analysis of the provision. Art III:2, second sentence has application if the measure at issue is not inconsistent with Article III:2, first sentence. In effect, the examination started always with the two-tier test under Article III:2, first sentence and if analysis failed then there is a need to study whether the measure is covered by the scope of ArticleIII:2, second sentence[2].

Conversely, the Art III:2, second sentence provides a different test for establishing a violation of National Treatment. In this case, it is a three-tier test, which required three substantive issues to determine whether an internal tax measure is inconsistent with Article III:2, second sentence. Following the Appellate Body rapport in the Japan – Alcoholic Beverages II case it is necessary to establish whether:

(1)  the imported products and the domestic products are ‘directly competitive or substitutable products’ which are in competition with each other;

(2)  the directly competitive or substitutable imported and domestic products are ‘not similarly taxed’; and

(3)  the dissimilar taxation of the directly competitive or substitutable imported domestic products is ‘applied … so as to afford protection to domestic production. [3]

Each of these elements must be examined separately, but the burden of proof under Article III:2, second sentence, required to demonstrate first, the products concerned are directly competitive or substitutable and second, that foreign products are taxed in such a way so as to afford protection to domestic production.[4]

The Analysis of the scope of Art III:2 second sentence draws the following conclusions. Article III:2 contains two separate obligations of national treatment where the second sentence applies only to taxes imposed on ‘directly competitive or substitutable products’ and not to ‘like product’ from the first sentence respectively. Therefore the scope of the second sentence is undoubted larger as products do not need to be identical and it is sufficient that they compete directly or suitable for the same purpose.

[1] Annex I: Notes and Supplementary Provisions, available: docs_e/legal_e/gatt47_03_e.htm

[2] Appellate Body Report, Canada – Periodicals, pp. 22-23.

[3] Appellate Body Report on Japan – Alcoholic Beverages II, p.24.

[4] Panel Report, Japan – Alcoholic Beverages II, para. 6.28. and Appellate Body Report on Korea – Alcoholic Beverages, para. 156.


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